Wal-Mart’s market battles could hurt retailers over the holidays

By Andria Cheng

Flickr/Keera Russell

Wal-Mart Stores Inc. is dealing with a confluence of competing factors when it comes to its low-income consumers, and its stepped up price promotions and aggressive marketing may not be enough to work holiday magic.

In fact, some analysts warn it could wreck havoc on the rest of the industry.

The world’s largest retailer on Thursday reported a surprise third-straight quarter of Walmart U.S. same-store sales decline, briefly sending the Dow component’s stock 1% lower. The mid-points of Wal-Mart’s fourth-quarter and updated full-year forecasts both fell short of Wall Street expectations.

“Everybody is still trying to absorb the 2% payroll tax increase,” Walmart U.S. chief Bill Simon told reporters on Thursday, adding several factors are offsetting the positive impact of lower gasoline prices and muted consumables inflation.

“Lack of clarity about what personal health care cost would be is another concern,” Simon said. “Our customers’ No. 1 concern is still around jobs and employment. Their income is going down and food is not. Gas is still eating up their budget despite abating. We aren’t going to see a rebound in consumer spending. The continued noise and angst with the government is still not good for consumer confidence.”

He said it’s hard to process whether the October government shutdown affected the overall business, but noted sales did decline during the time at stores near military bases. He also said it’s too early to forecast any impact from the reduction of food stamp benefits, which took effect Nov. 1.

Simon said Walmart U.S. comp sales last quarter fared the worst in August before rebounding and turning positive in the last two months of the quarter.

Still, even with the encouraging momentum Simon saw out of the third quarter, the unit projected flat fourth-quarter comparable sales instead of a return to positive territory. For the holiday, Simon said Walmart U.S. is increasing its marketing budget, giving local managers discretion to have special sales and has bought “deep” on sales items.

Walmart U.S. this week detailed its Black Friday promotions, including significantly increasing the number of sales items it guarantees for customers in line during the first hour of sales events on Thanksgiving. Longer term, the company also is opening more smaller-format stores to better compete against dollar store chains.

The one-hour guarantee “is dramatic,” said Janney analyst David Strasser, adding Walmart has the “biggest step up in Black Friday promotions” he’s seen in many years and predicted it will hurt profit. This “provides a significant challenge across retail this holiday, as Walmart is determined to lead the industry into the promotional abyss this year.”

Meanwhile, Sam’s Club, which targets a higher-income shopper than Wal-Mart, is a relative bright spot, with same-store sales up 1.1%, excluding fuel sales, as traffic increased instead of a decline at Walmart U.S.

Overseas, the 0.2% sales gain was again hurt by the impact of currency translations. Stripping that, sales would have been up 4.1%. In a sign that slow wage growth is affecting consumers outside the U.S., the company said for its Asda customers in the U.K., the costs of essential food and household items growing at 2.8% were well ahead of wage growth of 0.8 percent. The company’s comparable sales in Canada, Mexico and China all declined.

Chief Financial Officer Charles Holley said Wal-Mart also didn’t grow expenses at a slower rate than its sales, at a time when Wal-Mart also is spending aggressively to increase its online sales. Fourth-quarter results also will be hurt by expenses to shut 50 underperforming stores in China and Brazil and the company ending its franchise agreement in India with Bharti to run its own wholesale cash and carry stores.

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About Behind the Storefront

Behind the Storefront is a blog about all things retail. It’s aimed at investors, shoppers and anyone else with a passion for learning about what drives consumer behavior. Hosted by Andria Cheng, Behind the Storefront will cover the business, brands and shopping behavior that’s behind some of the biggest companies, and largest employers, in the world. You can reach Andria at Acheng@marketwatch.com.